First Western Financial Inc Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Profitability and Risk Management: Generated higher profitability in Q3 while prioritizing prudent risk management and conservative new loan production.
• Deposit Gathering: Achieved deposit inflows, with strong growth in non-interest bearing deposits contributing to a loan to deposit ratio of 95% at the end of Q3.
• Large Non-Performing Relationship: Resolved a large non-performing relationship, took possession of remaining properties (now in OREO), with one property sold and three remaining being marketed.
• Asset Quality: Saw positive trends in asset quality with declines in non-performing and classified loans. Non-performing loans and classified loans each down about 50% quarter-over-quarter.
• Financial Results: Net income was $2.1 million ($0.22 per diluted share) in Q3. Tangible book value per share increased by about 1%. Net interest income decreased due to higher interest expense and a credit migrating to non-accrual status. Non-interest income was flat. Non-interest expense up slightly due to higher salaries, expenses, and marketing, partially offset by a fraud loss recovery.

Segment Performance

• Loan Portfolio: Loans held for investment decreased $73 million from the prior quarter. New loan production was $83 million in Q3 compared to $50 million in the prior quarter, with most new production in commercial loans and residential mortgages.
• Deposits: Total deposits increased $92 million from the prior quarter, with the strongest growth in non-interest bearing deposits, which rose 19% from the end of the prior quarter.
• Trust and Investment Management: Assets under management increased $454 million in Q3, with AUM up nearly 17% over the past year.

Guidance

• Overall economic activity in markets is healthy, with opportunities to capitalize on competitive disruption.
• Expect solid operating leverage in the near term with modest balance sheet growth, improved net interest margin, higher fee income, and improved asset quality.
• Anticipate higher loan growth in 2025 as loan demand increases while maintaining disciplined pricing and underwriting.
• Interest rate declines expected to positively impact net interest margin and mortgage business. Cash from selling repossessed properties to be redeployed into interest earning assets.

Risks

• Uncertainties in overall economic activity.
• Impact of interest rate changes on cost of funds.
• Potential fluctuations in asset quality.
• Risks associated with acquisitions and business expansion.

Question and Answer

Q: Good morning everybody. I wanted to start on credit and walk through a few things if we could. The new credit that was moved to non-accrual, any color on that loan. And then if I understood correctly, the charge-offs were almost all or all related to the one large credit. So I wanted to understand kind of what happened there. And then from an ORE perspective, is that at this point the ranch in two houses? Maybe let's just start with those questions.

A: The $10 million loan was a borrower in a liquidity crunch. It's a loan directly to the borrower with good collateral pledge. Charge-offs were mostly related to the large credit moving from non-performing loans to OREO. Regarding OREO properties, one property sold, three remaining being marketed, with ranches typically taking 9-12 months to sell.

Q: Hey, thanks for taking my questions. Just one follow up on the DDAs. So, it sounds like that growth was driven pretty broad based amongst your customers, it wasn't influenced by just a handful of customers or sort of an outlier in that sense?

A: Correct Q: Hey, good morning, everyone. Thank you. Just on the spot rate NIM at the end of the quarter, 2.40%, does that include the interest reversal that negatively impacted that number by 6 bps or is that adjusted?

A: It does not include the impact of the interest reversal but includes non-accrual loans generating zero interest income Q: Thank you. To get some more perspective on the mortgage business. In particular, whether your view is that the strength that you saw this quarter was really seasonality or whether this strength can continue really as a result of the expansion of your MLO team?

A: September was a very strong month for mortgage production, with new MLOs contributing. Seasonality is expected, but new MLOs and pent-up demand bode well for continued strength Q: Good morning. I just got a quick question you touched upon it in the prior question. Scott, you opened up, I guess it was the Arizona office and I think it's billings, I think it is. Are those making money on a standalone basis or how would you describe the profitability of those branches today?

A: Two full service First Western profit centers in Arizona make money on a contribution basis. The Bozeman office is roughly breakeven trending in the right direction. Plans to grow those businesses with marketing and client events